Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “Annual Report”). This Quarterly Report contains statements that are not historical in nature, are predictive, or that depend upon or refer to future events or conditions or contain other forward-looking statements. Statements including, but not limited to, statements regarding the extent, timing and mix of future revenues and customer demand; the deployment of our products and services; the impact of the macroeconomic and geopolitical environment, including but not limited to, the expanded trade control laws and regulations, the conflicts in and around Ukraine, the Middle East and other areas of the world, volatility in foreign currency exchange rates, inflation and the rise in interest rates; the impact of government actions; future costs, expenses, tax rates and uses of cash; pending legal, administrative and tax proceedings; restructuring actions and associated charges and benefits; the accounting for acquisitions and integration of acquired businesses; and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will” and “would,” and words of similar import and the negatives thereof, constitute forward-looking statements. These statements are predictions based upon our current expectations about future events. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the “Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and “Liquidity and Capital Resources” sections contained in this Quarterly Report, the "Risk Factors" section contained in our Annual Report and our subsequent Quarterly Reports on Form 10-Q, and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements.

We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We disclaim any obligation to update these forward-looking statements, except as required by law.

Business Overview

Cadence is a leader in electronic system design, building upon more than 30 years of computational software expertise. We apply our underlying Intelligent System Design strategy to deliver computational software, hardware and intellectual property (“IP”) that turn design concepts into reality. We enable our customers to develop electronic products. Our products and services are designed to give our customers a competitive edge in their development of integrated circuits (“ICs”), systems-on-chip (“SoCs”), and increasingly sophisticated electronic devices and systems. Our products and services do this by optimizing performance, minimizing power consumption, shortening the time to bring our customers’ products to market, improving engineering productivity and reducing their design, development and manufacturing costs.

Our strategy is to provide the technology necessary for our customers to develop products across a variety of vertical markets including consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial, healthcare and life sciences. Our products and services enable our customers to develop complex and innovative electronic products, so demand for our technology is driven by our customers’ investment in new designs and products. Historically, the industry that provided the tools used by IC engineers was referred to as Electronic Design Automation (“EDA”). Today, our offerings include and extend beyond EDA.

We group our products into categories related to major design activities:

Custom IC Design and Simulation;
Digital IC Design and Signoff;
Functional Verification;
IP; and
System Design and Analysis.

For additional information about our products, see the discussion in Item 1, “Business,” under the heading “Products and Product Categories,” in our Annual Report.

Management uses certain performance indicators to manage our business, including revenue, certain elements of operating expenses and cash flow from operations, and we describe these items further below under the headings “Results of Operations” and “Liquidity and Capital Resources.”

Fiscal Year End

In fiscal 2022, our Board of Directors approved a change in our fiscal year end from the Saturday closest to December 31 of each year to December 31 of each year. The fiscal year change became effective beginning with our 2023 fiscal year, which began on January 1, 2023. Our fiscal quarters now end on March 31, June 30, and September 30.

Macroeconomic and Geopolitical Environment

Because we operate globally, our business is subject to the effects of expanded trade control laws and regulations, geopolitical conflict in and around Ukraine, Israel and other areas of the world, volatility in foreign currency exchange rates relative to the United States (“U.S.”) dollar and the rise in interest rates.

We have been impacted by the continued expansion of trade control laws and regulations, that include certain export control restrictions concerning advanced node IC production in China, the inclusion of additional Chinese technology companies on the Bureau of Industry and Security (“BIS”) “Entity List” and regulations governing the sale of certain technologies. Based on our current assessments, we expect the impact of these expanded trade control laws and regulations on our business to be limited.

We also continuously monitor geopolitical conflicts around the world and their effects on our business. During the first half of fiscal 2022, due to the ongoing conflict between Russia and Ukraine and the corresponding sanctions imposed by the United States and other countries, we terminated our operations in Russia. The termination of our operations in Russia has not limited our ability to develop or support our products and has not had a material impact on our results of operations, financial condition, liquidity or cash flows. We do not have operations or employees in Ukraine.

More recently, the conflict in the Middle East has had an impact on our employees and our customers in that region of the world. It is too early to determine the full extent of the impact this conflict could have on our business and our operations, and our assessment of the potential impacts is ongoing.

While our business model provides some resilience against these factors, we will continue to monitor the direct and indirect impacts of these or similar circumstances on our business and financial results. For additional information on the potential impact of other macroeconomic and geopolitical conditions on our business, see the “Risk Factors” sections in our Annual Report and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Q1 Report”). For additional information on the potential impact of foreign currency exchange rates and interest rates on our business, see the “Quantitative and Qualitative Disclosures About Market Risk” section of this Quarterly Report.

Critical Accounting Estimates

In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our revenue, operating income and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary.

For additional information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Estimates” in our Annual Report.

New Accounting Standards

For additional information about the adoption of new accounting standards, see Note 1 in the notes to condensed consolidated financial statements.

Results of Operations

Financial results for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, reflect the following:

Growth in revenue from our software and emulation and prototyping hardware offerings;
Continued investment in research and development activities and technical sales support; and
Restructuring activities designed to better align our resources with our business strategy.

Revenue

We primarily generate revenue from licensing our software and IP, selling or leasing our emulation and prototyping hardware technology, providing maintenance for our software, hardware and IP, providing engineering services and earning royalties generated from the use of our IP. The timing of our revenue is significantly affected by the mix of software, hardware and IP products generating revenue in any given period and whether the revenue is recognized over time or at a point in time, upon completion of delivery.

Approximately 85% of our annual revenue is characterized as recurring revenue. Recurring revenue includes revenue recognized over time from our software arrangements, services, royalties, maintenance on IP licenses and hardware, and operating leases of hardware. Recurring revenue also includes revenue recognized at varying points in time over the term of other arrangements with non-cancelable commitments, whereby the customer commits to a fixed dollar amount over a specified period of time that can be used to purchase from a list of products or services.

The remainder of our revenue is recognized at a point in time and is characterized as up-front revenue. Up-front revenue is primarily generated by our sales of emulation and prototyping hardware and individual IP licenses. The percentage of our recurring and up-front revenue and fluctuations in revenue within our geographies are impacted by delivery of hardware and IP products to our customers in any single fiscal period.

The following table shows the percentage of our revenue that is classified as recurring or up-front for the three and nine months ended September 30, 2023 and October 1, 2022:


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Revenue recognized over time	83	%	81	%	80	%	82	%
Revenue from arrangements with non-cancelable commitments	2	%	3	%	3	%	2	%
Recurring revenue	85	%	84	%	83	%	84	%
Up-front revenue	15	%	16	%	17	%	16	%
Total	100	%	100	%	100	%	100	%

While the percentage of revenue characterized as recurring compared to revenue characterized as up-front may vary between fiscal quarters, the overall mix of revenue is relatively consistent on an annual basis or over the course of twelve consecutive months. The following table shows the percentage of recurring revenue for the twelve-month periods ending concurrently with our five most recent fiscal quarters:


	Trailing Twelve Months Ended
	September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022		October 1, 2022
Recurring revenue	84	%	84	%	84	%	85	%	86	%
Up-front revenue	16	%	16	%	16	%	15	%	14	%
Total	100	%	100	%	100	%	100	%	100	%

Revenue by Period

The following table shows our revenue for the three months ended September 30, 2023 and October 1, 2022 and the change in revenue between periods:


	Three Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Product and maintenance	$	965.8	$	845.8	$	120.0	14	%
Services	57.3		56.8		0.5		1	%
Total revenue	$	1,023.1	$	902.6	$	120.5	13	%

The following table shows our revenue for the nine months ended September 30, 2023 and October 1, 2022 and the change in revenue between periods:


	Nine Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Product and maintenance	$	2,852.4	$	2,494.3	$	358.1	14	%
Services	169.0		167.5		1.5		1	%
Total revenue	$	3,021.4	$	2,661.8	$	359.6	14	%

Product and maintenance revenue growth during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was primarily due to our customers continuing to invest in new, complex designs for their products that include the design of electronic systems for consumer, hyperscale computing, mobile, 5G communications, automotive, aerospace and defense, industrial and healthcare.

Services revenue may fluctuate from period to period based on the timing of fulfillment of our services and IP performance obligations.

No single customer accounted for 10% or more of total revenue during the three and nine months ended September 30, 2023 or October 1, 2022.

Revenue by Product Category

The following table shows the percentage of revenue contributed by each of our five product categories and services for the past five consecutive quarters:


	Three Months Ended
	September 30, 2023		June 30, 2023		March 31, 2023		December 31, 2022		October 1, 2022
Custom IC Design and Simulation	22	%	22	%	20	%	22	%	22	%
Digital IC Design and Signoff	28	%	27	%	25	%	28	%	29	%
Functional Verification, including Emulation and Prototyping Hardware	26	%	27	%	32	%	25	%	25	%
IP	11	%	11	%	11	%	12	%	12	%
System Design and Analysis	13	%	13	%	12	%	13	%	12	%
Total	100	%	100	%	100	%	100	%	100	%

Revenue by product category fluctuates from period to period based on demand for our products and services, our available resources and our ability to deliver and support them. For example, during the first quarter of fiscal 2023, we experienced growth in our Functional Verification product category due to increased production capacity and our ability to fulfill ongoing customer demand for our emulation and prototyping hardware. Certain of our licensing arrangements allow customers the ability to remix among software products. Additionally, we have arrangements with customers that include a combination of our products, with the actual product selection and number of licensed users to be determined at a later date. For these arrangements, we estimate the allocation of the revenue to product categories based upon the expected usage of our products. The actual usage of our products by these customers may differ and, if that proves to be the case, the revenue allocation in the table above would differ.

Revenue by Geography


	Three Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
United States	$	421.6	$	392.2	$	29.4	7	%
Other Americas	15.8		15.2		0.6		4	%
China	172.0		148.3		23.7		16	%
Other Asia	197.8		156.3		41.5		27	%
Europe, Middle East and Africa (“EMEA”)	158.2		143.0		15.2		11	%
Japan	57.7		47.6		10.1		21	%
Total revenue	$	1,023.1	$	902.6	$	120.5	13	%


	Nine Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
United States	$	1,241.5	$	1,174.7	$	66.8	6	%
Other Americas	47.9		39.0		8.9		23	%
China	523.7		401.5		122.2		30	%
Other Asia	558.7		466.9		91.8		20	%
EMEA	479.3		431.6		47.7		11	%
Japan	170.3		148.1		22.2		15	%
Total revenue	$	3,021.4	$	2,661.8	$	359.6	14	%

During the three months ended September 30, 2023, as compared to the three months ended October 1, 2022, revenue growth in each of our six geographies was primarily driven by increased revenue from our software offerings, resulting from our customers’ continued investment in new, complex designs for their products. Also, during the three months ended September 30, 2023, as compared to the three months ended October 1, 2022, revenue growth from our emulation and prototyping hardware offerings contributed to the growth experienced in the United States, China, Other Asia and Japan.

During the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, revenue growth in the United States, Other Americas, Other Asia, EMEA and Japan was primarily driven by increased revenue from our software offerings. Revenue growth in China during the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, was primarily due to increased revenue from our emulation and prototyping hardware offerings. This growth was driven by increased production capacity to address continued demand from our customers in China for our emulation and prototyping hardware offerings.

Revenue by Geography as a Percent of Total Revenue


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
United States	41	%	43	%	41	%	44	%
Other Americas	2	%	2	%	2	%	1	%
China	17	%	17	%	17	%	15	%
Other Asia	19	%	17	%	18	%	18	%
EMEA	15	%	16	%	16	%	16	%
Japan	6	%	5	%	6	%	6	%
Total	100	%	100	%	100	%	100	%

Most of our revenue is transacted in the U.S. dollar. However, certain revenue transactions are denominated in foreign currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion under Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

Cost of Revenue

The following tables show our cost of revenue for the three and nine months ended September 30, 2023 and October 1, 2022 and the change in cost of revenue between periods:


	Three Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Cost of product and maintenance	$	85.8	$	62.4	$	23.4	38	%
Cost of services	23.8		25.2		(1.4)		(6)	%


	Nine Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Cost of product and maintenance	$	260.3	$	203.9	$	56.4	28	%
Cost of services	70.6		74.2		(3.6)		(5)	%

Cost of Product and Maintenance

Cost of product and maintenance includes costs associated with the sale and lease of our emulation and prototyping hardware and licensing of our software and IP products, certain employee salary and benefits and other employee-related costs, cost of our customer support services, amortization of technology-related and maintenance-related acquired intangibles, costs of technical documentation and royalties payable to third-party vendors. Cost of product and maintenance depends primarily on our hardware product sales in any given period, but is also affected by employee salary and benefits and other employee-related costs, reserves for inventory, and the timing and extent to which we acquire intangible assets, license third-party technology or IP, and sell our products that include such acquired or licensed technology or IP.

A summary of cost of product and maintenance is as follows:


	Three Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Product and maintenance-related costs	$	74.8	$	53.5	$	21.3	40	%
Amortization of acquired intangibles	11.0		8.9		2.1		24	%
Total cost of product and maintenance	$	85.8	$	62.4	$	23.4	38	%


	Nine Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Product and maintenance-related costs	$	228.4	$	173.0	$	55.4	32	%
Amortization of acquired intangibles	31.9		30.9		1.0		3	%
Total cost of product and maintenance	$	260.3	$	203.9	$	56.4	28	%

The changes in product and maintenance-related costs for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, were due to the following:


	Change
	Three Months Ended		Nine Months Ended
	(In millions)
Emulation and prototyping hardware costs	$	20.1	$	47.8
Salary, benefits and other employee-related costs	1.0		5.5
Other items	0.2		2.1
Total change in product and maintenance-related costs	$	21.3	$	55.4

Costs associated with our emulation and prototyping hardware products include components, assembly, testing, applicable reserves and overhead. These costs make our cost of emulation and prototyping hardware products higher, as a percentage of revenue, than our cost of software and IP products. Emulation and prototyping hardware costs increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to increased revenue from emulation and prototyping hardware products.

Amortization of acquired intangibles included in cost of product and maintenance may fluctuate from period to period depending on the timing of newly acquired assets relative to assets becoming fully amortized in any given period.

Cost of Services

Cost of services primarily includes employee salary, benefits and other employee-related costs to perform work on revenue-generating projects and costs to maintain the infrastructure necessary to manage a services organization. Cost of services may fluctuate from period to period based on our utilization of design services engineers on revenue-generating projects rather than internal development projects.

Operating Expenses

Our operating expenses include marketing and sales, research and development, and general and administrative expenses. Factors that tend to cause our operating expenses to fluctuate include changes in the number of employees due to hiring and acquisitions, our annual mid-year promotion and pay raise cycle, stock-based compensation, foreign exchange rate movements, acquisition-related costs, volatility in variable compensation programs that are driven by operating results, and charitable donations.

Many of our operating expenses are transacted in various foreign currencies. We recognize lower expenses in periods when the United States dollar strengthens in value against other currencies and we recognize higher expenses when the United States dollar weakens against other currencies. For an additional description of how changes in foreign exchange rates affect our condensed consolidated financial statements, see the discussion in Item 3, “Quantitative and Qualitative Disclosures About Market Risk – Foreign Currency Risk.”

Our operating expenses for the three and nine months ended September 30, 2023 and October 1, 2022 were as follows:


	Three Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Marketing and sales	$	176.2	$	152.9	$	23.3	15	%
Research and development	369.6		323.6		46.0		14	%
General and administrative	58.6		73.7		(15.1)		(20)	%
Total operating expenses	$	604.4	$	550.2	$	54.2	10	%


	Nine Months Ended				Change
	September 30, 2023		October 1, 2022		Amount		Percentage
	(In millions, except percentages)
Marketing and sales	$	510.0	$	432.4	$	77.6	18	%
Research and development	1,074.4		901.1		173.3		19	%
General and administrative	166.7		174.1		(7.4)		(4)	%
Total operating expenses	$	1,751.1	$	1,507.6	$	243.5	16	%

Our operating expenses, as a percentage of total revenue, for the three and nine months ended September 30, 2023 and October 1, 2022 were as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Marketing and sales	17	%	17	%	17	%	16	%
Research and development	36	%	36	%	35	%	34	%
General and administrative	6	%	8	%	6	%	7	%
Total operating expenses	59	%	61	%	58	%	57	%

Marketing and Sales

The increase in marketing and sales expense for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was due to the following:


	Change
	Three Months Ended		Nine Months Ended
	(In millions)
Salary, benefits and other employee-related costs	$	15.2	$	45.5
Marketing programs and events	0.4		9.6
Stock-based compensation	3.1		9.2
Facilities and other infrastructure costs	2.3		6.9
Travel and sales meetings	1.2		5.7
Other items	1.1		0.7
Total change in marketing and sales expense	$	23.3	$	77.6

Salary, benefits and other employee-related costs and stock-based compensation included in marketing and sales expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to our continued investment in attracting and retaining talent dedicated to technical sales support, including additional headcount from the acquisitions completed in both fiscal 2022 and fiscal 2023. Costs related to marketing programs and events, travel and sales meetings increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to an increased number of in-person meetings and events. We expect to continue attracting and retaining talent dedicated to technical sales support through hiring and acquisitions.

Research and Development

The increase in research and development expense for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was due to the following:


	Change
	Three Months Ended		Nine Months Ended
	(In millions)
Salary, benefits and other employee-related costs	$	26.6	$	119.4
Stock-based compensation	9.7		26.6
Facilities and other infrastructure costs	4.6		14.3
Professional services	2.2		5.1
Materials and other pre-production costs	2.1		4.5
Travel	0.6		4.0
Other items	0.2		(0.6)
Total change in research and development expense	$	46.0	$	173.3

Salary, benefits and other employee-related costs and stock-based compensation included in research and development expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to our continued investment in attracting and retaining talent for research and development activities, including additional headcount from the acquisitions completed in both fiscal 2022 and fiscal 2023. Facilities and other infrastructure costs included in research and development expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to our growing workforce. We expect to continue attracting and retaining talent dedicated to research and development activities through hiring and acquisitions.

General and Administrative

The decrease in general and administrative expense for the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, was due to the following:


	Change
	Three Months Ended		Nine Months Ended
	(In millions)
Salary, benefits and other employee-related costs	$	3.2	$	15.9
Stock-based compensation	1.5		4.7
Foreign service tax	4.0		4.1
Professional services	1.8		(4.6)
Contributions to non-profit organizations	(25.0)		(29.0)
Other items	(0.6)		1.5
Total change in general and administrative expense	$	(15.1)	$	(7.4)

Salary, benefits and other employee-related costs and stock-based compensation included in general and administrative expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to additional headcount. Also during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, we experienced an increase in foreign service tax, primarily because we did not benefit from any foreign service tax refunds like we did during the same period in fiscal 2022.

During the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, contributions to non-profit organizations decreased, primarily due to the timing of our periodic contributions to support charitable initiatives, including the Cadence Giving Foundation.

Restructuring

In August 2023, we initiated a restructuring plan (the “2023 Restructuring Plan”) designed to better align our resources with our business strategy. During the three and nine months ended September 30, 2023, we incurred $11.6 million of costs comprised of severance and other termination benefits related to headcount reductions. These costs are included in restructuring in our condensed consolidated income statements.

Inclusive of the 2023 Restructuring Plan, we are evaluating certain facilities for closure. Restructuring charges for the facilities under consideration are not expected to exceed $5 million. Restructuring costs related to facility closures will be primarily comprised of accelerated Right-of-Use (“ROU”) asset amortization, interest accretion on lease liabilities after the facility is vacated, lease buyout costs and certain contractual costs to maintain facilities during the period after abandonment. We record accelerated ROU asset amortization over the period beginning from when the decision is made to abandon the facility until the facility is fully vacated and we have no intention to further utilize the leased space. Other facilities-related restructuring charges are generally recorded in the period in which the affected facilities are vacated.

Because the restructuring charges and related benefits are derived from management’s estimates made during the formulation of the restructuring plans, based on then-currently available information, our restructuring plans may not achieve the benefits anticipated on the timetable or at the level contemplated. Additional actions, including further restructuring of our operations, may be required in the future.

Operating Margin

Operating margin represents income from operations as a percentage of total revenue. Our operating margin for the three and nine months ended September 30, 2023, and the three and nine months ended October 1, 2022 was as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
Operating margin	29	%	29	%	30	%	32	%

Operating margin decreased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to the mix of products and services sold during each respective period. In addition, our fiscal 2022 acquisitions resulted in incremental expenses, including acquisition of acquired intangibles, that exceeded incremental revenue during the three and nine months ended September 30, 2023.

Interest Expense


	Three Months Ended				Nine Months Ended
	September 30, 2023		October 1, 2022		September 30, 2023		October 1, 2022
	(In millions)
Contractual cash interest expense:
2024 Notes	3.8		3.8		$	11.4	$	11.4
2025 Term Loan	4.6		0.9		13.0		0.9
Revolving credit facility	0.2		0.7		1.9		1.1
Amortization of debt discount:
2024 Notes	0.3		0.2		0.7		0.6
2025 Term Loan	0.1		—		0.2		—
Other	0.1		(0.1)		—		(0.1)
Total interest expense	$	9.1	$	5.5	$	27.2	$	13.9

Interest expense increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended October 1, 2022, primarily due to borrowings under our 2025 Term Loan, which are subject to variable interest rates. For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.

Income Taxes

The following table presents the provision for income taxes and the effective tax rate for the three and nine months ended September 30, 2023 and October 1, 2022:


	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023			October 1, 2022
							(In millions, except percentages)
Provision for income taxes	$	45.6		$	66.0		$	202.6		$	226.3
Effective tax rate	15.2		%	26.1		%	22.0		%	27.1		%

Our provision for income taxes for the three and nine months ended September 30, 2023 was primarily attributable to federal, state and foreign income taxes on our anticipated fiscal 2023 income. We also recognized tax benefits of $21.0 million and $46.8 million related to stock-based compensation that vested or was exercised during each period.

Our provision for income taxes for the three and nine months ended October 1, 2022 was primarily attributable to federal, state and foreign income taxes on our then anticipated fiscal 2022 income. We also recognized a tax benefit of $18.0 million and $36.9 million related to stock-based compensation that vested or was exercised during each period.

Our future effective tax rates may also be materially impacted by tax amounts associated with our foreign earnings at rates different from the United States federal statutory rate, research credits, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, closure of statutes of limitations or settlement of tax audits and changes in tax law. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and Hungary. Our future effective tax rates may be adversely affected if our earnings were to be lower in countries where we have lower statutory tax rates. We currently expect that our fiscal 2023 effective tax rate will be approximately 23%. We expect that our quarterly effective tax rates will vary from our fiscal 2023 effective tax rate as a result of recognizing the income tax effects of stock-based awards in the quarterly periods that the awards vest or are settled and other items that we cannot anticipate. For additional discussion about how our effective tax rate could be affected by various risks, see Part I, Item 1A, “Risk Factors,” in our Annual Report.

Liquidity and Capital Resources


	As of
	September 30, 2023		December 31, 2022		Change
	(In millions)
Cash and cash equivalents	$	962.0	$	882.3	$	79.7
Net working capital	560.3		359.1		201.2

Cash and Cash Equivalents

As of September 30, 2023, our principal sources of liquidity consisted of approximately $962.0 million of cash and cash equivalents as compared to $882.3 million as of December 31, 2022.

Our primary sources of cash and cash equivalents during the nine months ended September 30, 2023 were cash generated from operations, proceeds from the issuance of common stock resulting from stock purchases under our employee stock purchase plan and stock options exercised during the period, proceeds from the sale of investments, and proceeds from our revolving credit facility.

Our primary uses of cash and cash equivalents during the nine months ended September 30, 2023 were payments related to employee salaries and benefits, operating expenses, repurchases of our common stock, cash paid for acquired businesses, payments on our revolving credit facility, purchases of investments, payment of employee taxes on vesting of restricted stock, and purchases of property, plant and equipment.

Approximately 66% of our cash and cash equivalents were held by our foreign subsidiaries as of September 30, 2023. Our cash and cash equivalents held by our foreign subsidiaries may vary from period to period due to the timing of collections and repatriation of foreign earnings. We expect that current cash and cash equivalent balances and cash flows that are generated from operations and financing activities will be sufficient to meet the needs of our domestic and international operating activities and other capital and liquidity requirements, including acquisitions, investments and share repurchases, for at least the next 12 months and thereafter for the foreseeable future.

Net Working Capital

Net working capital is comprised of current assets less current liabilities, as shown on our condensed consolidated balance sheets. The increase in our net working capital as of September 30, 2023, as compared to December 31, 2022, is primarily due to the timing of cash receipts from customers and disbursements made for operating and financing activities.

Cash Flows from Operating Activities


	Nine Months Ended
	September 30, 2023		October 1, 2022		Change
	(In millions)
Cash provided by operating activities	$	1,077.1	$	978.3	$	98.8

Cash flows from operating activities include net income, adjusted for certain non-cash items, as well as changes in the balances of certain assets and liabilities. Our cash flows provided by operating activities are significantly influenced by business levels and the payment terms set forth in our customer agreements. The increase in cash flows from operating activities for the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, was primarily due to improved results from operations and the timing of cash receipts from customers and the timing of cash disbursements, including cash used for interest and taxes.

Cash Flows Used for Investing Activities


	Nine Months Ended
	September 30, 2023		October 1, 2022		Change
	(In millions)
Cash used for investing activities	$	(313.6)	$	(674.5)	$	360.9

Cash used for investing activities decreased during the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, primarily due to decreases in cash used for business combinations, partially offset by increases in cash used for purchases of equity and debt securities. We expect to continue our investing activities, including purchasing property, plant and equipment, purchasing intangible assets, acquiring other companies and businesses, and making investments.

Cash Flows Used for Financing Activities


	Nine Months Ended
	September 30, 2023		October 1, 2022		Change
	(In millions)
Cash used for financing activities	$	(666.0)	$	(299.9)	$	(366.1)

Cash used for financing activities increased during the nine months ended September 30, 2023, as compared to the nine months ended October 1, 2022, primarily due to a decrease in proceeds from debt, partially offset by a decrease in payments for repurchases of our common stock.

Other Factors Affecting Liquidity and Capital Resources

Stock Repurchase Program

In August 2023, our Board of Directors increased the prior authorization to repurchase shares of our common stock by authorizing an additional $1.0 billion. The actual timing and amount of repurchases are subject to business and market conditions, corporate and regulatory requirements, stock price, acquisition opportunities and other factors. As of September 30, 2023, approximately $1.5 billion of the share repurchase authorization remained available to repurchase shares of our common stock. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for additional information on share repurchases.

Revolving Credit Facility

In June 2021, we entered into a five-year senior unsecured revolving credit facility with a group of lenders led by Bank of America, N.A., as administrative agent, as amended in September 2022 (the “2021 Credit Facility”). The 2021 Credit Facility provides for borrowings up to $700.0 million, with the right to request increased capacity up to an additional $350.0 million upon receipt of lender commitments, for total maximum borrowings of $1.05 billion. The 2021 Credit Facility expires on June 30, 2026. Any outstanding loans drawn under the 2021 Credit Facility are due at maturity on June 30, 2026, subject to an option to extend the maturity date. Outstanding borrowings may be repaid at any time prior to maturity. Interest rates associated with the 2021 Credit Facility are variable, so interest expense is impacted by changes in the interest rates, particularly for periods when there are outstanding borrowings under the revolving credit facility. Interest is payable quarterly. As of September 30, 2023, there were no borrowings outstanding under the 2021 Credit Facility, and we were in compliance with all financial covenants associated with such credit facility.

2024 Notes

In October 2014, we issued a $350.0 million aggregate principal amount of 4.375% Senior Notes due October 15, 2024 (the “2024 Notes”). We received net proceeds of $342.4 million from the issuance of the 2024 Notes, net of a discount of $1.4 million and issuance costs of $6.2 million. Interest is payable in cash semi-annually. The 2024 Notes are unsecured and rank equal in right of payment to all of our existing and future senior indebtedness. As of September 30, 2023, we were in compliance with all covenants associated with the 2024 Notes.

2025 Term Loan

In September 2022, we entered into a $300.0 million three-year senior non-amortizing term loan facility due on September 7, 2025 with a group of lenders led by Bank of America, N.A., as administrative agent (the “2025 Term Loan”). The 2025 Term Loan is unsecured and ranks equal in right of payment to all of our unsecured indebtedness. Interest rates associated with the 2025 Term Loan are variable, so interest expense is impacted by changes in interest rates. Interest is payable quarterly. As of September 30, 2023, we were in compliance with all financial covenants associated with the 2025 Term Loan.

For additional information relating to our debt arrangements, see Note 4 in the notes to condensed consolidated financial statements.

Other Liquidity Requirements

During the nine months ended September 30, 2023, there were no material changes to our other liquidity requirements as reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report.

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